Are Workers Paid their Marginal Product? Evidence from a Low Wage Labour Market
Because of labour market frictions, the supply of labour to a firm does not fall instantaneously to zero if an employer cuts wages. This gives employers some monopsony power. In the absence of trade unions, minimum wages and efficiency wage considerations a profit-maximising employer will set a wage below the marginal revenue product of labour so that workers are, to use the terminology of Hicks and Pigou, exploited. This paper presents a method for computing the rate of exploitation. This method is then applied to a unique data set on workers in residential homes for the elderly on England's sunshine coast. We conclude that, on average, firms pay workers about 15% less than their marginal product.
Year of publication: |
1993-07
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Authors: | Machin, Stephen ; Manning, Alan ; Woodland, S |
Institutions: | Centre for Economic Performance, LSE |
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